Economics is infamous for the difference of opinion among its practitioners. The consensus is very rare. Interestingly, we now have a consensus that India is in a serious economic slowdown and recovery will be gradual and slow. From the market’s perspective,
The important questions are: How serious is the slowdown? When can we expect a recovery in the economy? How are markets positioned?
- The Slowdown is sharp.
- Global Economy slowing
- Synchronized global monetary stimulus
- India will rebound in H2
- Bold reforms to trigger animal spirits
- History will repeat itself
The slowdown is sharp
The slowdown is, indeed, very sharp. The FY2019 growth rate of 6.8 per cent was the slowest in five years and Q1 FY2020 growth rate of 5 per cent was a 25-quarter low. If the Q2 FY2020 growth rate also comes below 6 per cent, which is very likely, it would mark a serious deceleration. If that happens, it would be the first time in seven years that India would be seeing GDP growth below 6 per cent for two consecutive quarters.
Global economy slowing
The global economy, which accelerated in 2017 and 2018, has been decelerating this year. According to the IMF, Calendar 2019 is likely to end with global output growing at around 3 per cent. Even though US growth and employment data have been impressive, the economy is decelerating after the longest expansion in history.
Synchronized global monetary stimulus
The US Fed again cut interest rates on October 30, without signaling an accommodative policy. Earlier the ECB had announced QE 2.0. For the first time in 10 years, 20 central banks have cut rates this year, which is indicative of the serious slowdown in the global economy.
This monetary accommodation can succeed in pre-empting a global recession in 2020, but a lot depends on how the US-China trade war evolves.
India will rebound in H2
The government has responded, though a bit late, to the challenging economic environment in India with appropriate stimulus. The big bang corporate tax cut has come as the icing on the cake of several stimulus packages announced earlier. The monetary stimulus provided by RBI through five rounds of rate cuts totaling 135 bps will start yielding results soon. Since inflation is very low, there is room for further rate cuts by RBI. Monetary policy acts.
Bold reforms to trigger animal spirits
The policy environment in India is changing fast in favour of reforms. Bold reform, including privatisation, is the only way out of the quagmire of decelerating growth. The government has recognised this, though a bit late. With strategic sales of BPCL and other PSUs, privatisation will gather momentum. After the steep cut in corporate tax rate already announced, there is also talk of a cut in personal income-tax.
History will repeat itself
The stock market presents a classic example of history repeating itself. History of stock markets tells us that booms are followed by crashes, and crashes lead to smart rebounds, taking the market to levels higher than the previous highs. Let’s take a look at the booms, crashes and recoveries of the Indian stock market since the early 1990s.
- By V K Vijayakumar